By Bart Hubbard, Realtor, DRE #01815497 | Published July 20, 2026 | Updated October 1, 2026
You pay capital gains tax on an inherited house only on the growth above its fair market value on the date of death, not above what your parent paid. That rule, called stepped-up basis, comes from IRC section 1014(a). If you sell soon after the death for about the date-of-death value, the taxable gain is often small or zero.
Basis is the starting value the IRS uses to figure a gain or loss. For inherited property, federal law resets that starting value to the market value at death. Decades of growth during the parent’s lifetime are never taxed as capital gain.
The one thing most heirs get wrong is using the parent’s purchase price as the basis. Another common mix-up is confusing capital gains tax with estate or inheritance tax, which are separate taxes. California imposes neither for current deaths, and the federal estate tax reaches only very large estates.
Key Facts
- An inherited home’s basis is its fair market value on the date of death, or on the alternate valuation date if elected under IRC 2032 (IRC 1014(a)).
- The IRS treats a sale of inherited property as long-term, no matter how long the heir held it (IRS Form 8949 instructions).
- On Form 8949, heirs write “INHERITED” as the date acquired.
- California has no lower rate for capital gains and taxes them as ordinary income (Franchise Tax Board).
- California has no estate tax for deaths on or after January 1, 2005, and its inheritance tax applies only to deaths before June 8, 1982 (State Controller).
- The federal estate tax basic exclusion is $15,000,000 for people who die in 2026 (IRS).
- A California probate referee charges 0.1% of the value appraised, with a $75 minimum.
What Is Stepped-Up Basis on an Inherited House?
Stepped-up basis means the heir’s tax starting point is the home’s fair market value on the date of death. Under IRC 1014(a), inherited property takes a basis equal to “the fair market value of the property at the date of the decedent’s death.” The IRS gifts and inheritances FAQ explains the same rule in plain terms.
The taxable gain on a later sale is roughly the sale price, minus selling costs, minus that stepped-up value. For a deeper look at how basis works over time, read How Does Stepped-Up Basis Work on an Inherited Home?
How Do You Prove the Value on the Date of Death?
You need a credible written value as of the date of death. In a California probate, the probate referee usually provides it. A probate referee is an appraiser appointed by the State Controller to value estate assets such as real estate, with at least one per county.
The inventory and appraisal is due within four months after letters first issue (Prob. Code 8800). Letters are the court document that gives the personal representative, the executor or administrator, authority to act. The referee’s fee is 0.1% of the value appraised, from a $75 minimum up to, in most cases, a $10,000 maximum per estate (Prob. Code 8961 and 8963).
When a home passes through a trust instead, there is no referee. A successor trustee, the person who takes over managing a trust after the settlor dies, often orders a date-of-death appraisal from a licensed appraiser. Keep that report with your tax records.
Is the Gain Long-Term or Short-Term?
The gain is long-term, even if you sell the week after the funeral. The IRS Form 8949 instructions say to report property acquired by inheritance as a long-term gain or loss “regardless of how long you held the property.”
On Form 8949, write “INHERITED” in the date-acquired column. Long-term treatment matters for federal tax because long-term gains are generally taxed at lower federal rates than ordinary income. Ask your CPA how the rates apply to your return.
How Does California Tax the Gain?
California taxes the gain as ordinary income, at the same rates as wages. The Franchise Tax Board states that “California does not have a lower rate for capital gains. All capital gains are taxed as ordinary income.”
That makes the stepped-up basis especially valuable for California heirs. Every dollar of gain the step-up erases is a dollar that is not taxed at your full state income tax rate.
Does California Have an Inheritance or Estate Tax?
No. According to the State Controller’s Office, no California estate tax return is required for deaths on or after January 1, 2005. California’s inheritance tax applies only to deaths before June 8, 1982.
The federal estate tax is a separate tax on very large estates. For people who die in 2026, the basic exclusion amount is $15,000,000, up from $13,990,000 for 2025, according to the IRS. Only estates above that amount face the federal estate tax.
What Costs Can Reduce the Taxable Gain?
Selling costs and certain improvements made after the date of death can reduce the gain. Selling costs generally include items such as real estate commissions and escrow fees. Improvements are projects that add value or extend the home’s life, such as a new roof, as opposed to routine repairs.
Keep every closing statement, invoice and receipt. Your CPA decides how each item is treated, and the right records can turn a small gain into no gain. If you are weighing repairs, see Should You Fix Up an Inherited House or Sell It As-Is?
What If a Surviving Spouse Owned the House as Community Property?
A surviving spouse in California may get a step-up on both halves of community property, not just the half that belonged to the spouse who died. IRC 1014(b)(6) covers the survivor’s half when at least half of the community interest is included in the deceased spouse’s gross estate. IRS Publication 555 says the whole property’s fair market value then generally becomes the basis, and that this rule does not apply to registered domestic partners.
Whether the house counts as community property depends on how the couple held title and other facts, so confirm it before relying on a full step-up.
This situation is common in California and worth a specific conversation with a CPA. It can make a large difference when the surviving spouse later sells, or when the children inherit after both parents have died.
What Does This Look Like With Real Numbers?
Illustrative example, not a real client.
A parent bought a Sacramento house in 1987 for $92,000. The probate referee values it at $610,000 on the date of death. The heirs sell seven months later for $655,000 and pay $38,000 in selling costs (an assumption for illustration).
- Amount realized: $655,000 – $38,000 = $617,000
- Stepped-up basis: $610,000
- Taxable gain: $617,000 – $610,000 = $7,000, long-term for federal tax
Without the step-up, the gain would be $617,000 – $92,000 = $525,000. The step-up removes $518,000 of gain from the calculation.
Change one fact: the heirs keep the house four years, then sell for $760,000 with $44,000 in selling costs.
- Amount realized: $760,000 – $44,000 = $716,000
- Taxable gain: $716,000 – $610,000 = $106,000
- The gain is still long-term for federal tax, and California taxes the full $106,000 as ordinary income.
Holding the house turned a $7,000 gain into a $106,000 gain. That growth may still be worth it, but the heirs should plan for the tax. Compare options in Should You Keep, Rent or Sell an Inherited House?
What Mistakes Should You Avoid?
- Using the parent’s purchase price as the basis. The heir could report and pay tax on decades of growth that federal law excludes.
- Skipping a date-of-death valuation. Without one, proving the stepped-up basis to the IRS becomes much harder.
- Assuming a quick sale is short-term. Inherited property is reported as long-term regardless of the holding period.
- Tossing closing statements and repair receipts. Lost records can mean paying tax on a larger gain than necessary.
- Confusing capital gains tax with estate tax. California has no estate or inheritance tax for current deaths, and the federal estate tax applies only above $15,000,000 in 2026.
Summary
- An inherited home’s basis is its fair market value on the date of death, or the alternate valuation date if elected (IRC 1014(a)).
- Only growth above that value is taxable when the heirs sell.
- A sale of inherited property is reported as long-term, with “INHERITED” as the date acquired on Form 8949.
- California taxes capital gains as ordinary income.
- California has no estate tax for deaths on or after January 1, 2005, and no inheritance tax for deaths on or after June 8, 1982.
- The federal estate tax basic exclusion is $15,000,000 for 2026 deaths.
- In probate, the probate referee’s appraisal usually documents the date-of-death value.
- Selling costs and qualifying improvements can reduce the gain.
Run your numbers: Use the Stepped-Up Basis Calculator to enter the date-of-death value, your expected sale price and selling costs, and see an estimate of your taxable gain to review with your CPA.
Next Steps
Talk with Bart: Book a free 15-minute call. I’ll listen to where you are in the process, look at the property, and tell you your options, including the ones that don’t involve hiring me.
Download the Sacramento-Area Probate Home Sale Guide: A free PDF that walks you through the sale step by step, including which records to keep for your CPA.
This article is general information, not legal or tax advice. Probate and tax rules depend on your facts. Talk with a California probate attorney or CPA before acting. Figures current as of October 1, 2026.
About the Author
Bart Hubbard is a Realtor with HomeSmart ICARE Realty (DRE #01815497) and a C.A.R. Certified Probate and Trust Specialist who helps families across the greater Sacramento area sell inherited, probate and trust homes. He works alongside probate attorneys, fiduciaries and local vendors to handle pricing, cleanouts, repairs and court-confirmation sales, so executors can focus on their families. More about Bart is on his bio page.